CONSOLIDATED OIL & GAS INC., PETITIONER V. SOUTHERN UNION COMPANY
AND FEDERAL ENERGY REGULATORY COMMISSION
No. 89-911
In The Supreme Court Of The United States
October Term, 1989
On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The District Of Columbia Circuit
Brief For The Federal Energy Regulatory Commission In Opposition
TABLE OF CONTENTS
Question Presented
Opinions below
Jurisdiction
Statement
Argument
Conclusion
OPINIONS BELOW
The opinion of the court of appeals (Pet. App. 1a-13a) is reported
at 857 F.2d 812. The order of the Federal Energy Regulatory
Commission permitting petitioner to collect the state court judgment
(Pet. App. 40a-53a) is reported at 35 F.E.R.C. Paragraph 61,359. The
order of the Federal Energy Regulatory Commission denying rehearing
(Pet. App. 54a-56a) is reported at 39 F.E.R.C. Paragraph 61,212. The
order of the Federal Energy Regulatory Commission reaffirming and
clarifying its prior orders in the case (Pet. App. 57a-66a) is
reported at 41 F.E.R.C. Paragraph 61,203. The initial order of the
Federal Energy Regulatory Commission (Pet. App. 14a-25a) and its order
denying rehearing (Pet. App. 26a-39a) are reported at 28 F.E.R.C.
Paragraph 61,225, and 30 F.E.R.C. Paragraph 61,350, respectively.
JURISDICTION
The judgment of the court of appeals (Pet. App. 93a-94a) was
entered on September 23, 1988. A petition for rehearing was denied on
September 12, 1989. Pet. App. 95a. The petition for a writ of
certiorari was filed on December 7, 1989. The jurisdiction of this
Court is invoked under 28 U.S.C. 1254(1).
QUESTION PRESENTED
Whether the court of appeals properly exercised its jurisdiction to
review an order of the Federal Energy Regulatory Commission that
permitted petitioner, a natural gas producer, to collect a state court
judgment against a natural gas gathering company based on the latter's
refusal to pay certain contract prices for natural gas.
STATEMENT
This case involves the District of Columbia Circuit's review of a
declaratory order of the Federal Energy Regulatory Commission holding
that federal law did not prevent a natural gas producer, petitioner
Consolidated Oil & Gas, Inc., from collecting a state court judgment
obtained against a natural gas gathering company, respondent Southern
Union Company.
1. During the 1960s and early 1970s, Southern Union purchased
natural gas from Consolidated that was produced in the San Juan Basin
area of New Mexico. Southern Union bought that gas under long-term
contracts that contained "favored nation" clauses requiring Southern
Union to pay Consolidated prices equal to the highest paid to any
producer in the San Juan Basin. Four of those contracts involved gas
sold for resale in interstate commerce and were thus subject to
regulation by the Federal Energy Regulatory Commission under the
Natural Gas Act (NGA), 15 U.S.C. 717 et seq., and the Natural Gas
Policy Act (NGPA), 15 U.S.C. 3301 et seq. Pet. App. 2a-3a, 15a-16a.
In 1979, after reaching a settlement agreement several years
earlier, Consolidated filed an action against Southern Union in New
Mexico state court. That action, which raised claims for breach of
contract, fraud, and negligent misrepresentation, challenged Southern
Union's refusal to pay an amount higher than the prevailing interstate
rate on four contracts for natural gas. /1/ After a bench trial, the
state court found that Southern Union had negligently misrepresented
that the gas purchased under the four contracts was resold in
intrastate markets, thereby inducing Consolidated to release certain
claims resolved by the earlier settlement. Pet. App. 3a-4a, 41a-45a.
The trial court awarded Consolidated compensatory damages of
approximately $8.5 million, "which is the amount equal to the
difference between what it was paid by SOUTHERN UNION under the
settlement agreement and the amount it would have been paid had the
representations of SOUTHERN UNION been true." Id. at 90a-91a. /2/ The
New Mexico Supreme Court affirmed that judgment. Id. at 67a-80a;
Consolidated Oil & Gas, Inc. v. Southern Union Co., 106 N.M. 719, 749
P.2d 1098 (1987), cert. denied, 484 U.S. 1063 (1988).
2. While Southern Union's appeal was pending before the New Mexico
Supreme Court, Southern Union petitioned the Commission for a
declaratory order "that Consolidated could not collect its judgment
because to do so would constitute exacting an unlawful price for
interstate gas." Pet. App. 5a. Consolidated intervened and opposed
that petition. Id. at 47a.
In its final order issued in November 1987, /3/ the Commission
denied Southern Union's petition. The Commission concluded that the
damages awarded to Consolidated represented tort damages as opposed to
contract damages, and thus were not compensation for interstate gas
sold under the contracts. Pet. App. 62a-64a. The Commission
distinguished this case from Arkansas-Louisiana Gas Co. v. Hall, 453
U.S. 571 (1981) (Arkla), since "under the specific facts presented
here, the damages awarded do not constitute part of the price of gas,"
Pet. App. 65a. Accordingly, the Commission held that federal law
governing interstate sales of natural gas did not preempt the New
Mexico state court judgment and that Consolidated could lawfully
collect that damages award. Id. at 65a-66a.
Southern Union then filed a petition for review of the Commission's
final order in the District of Columbia Circuit. Pet. App. 2a; see
Section 19 of the NGA, 15 U.S.C. 717r. /4/
3. In September 1988, the court of appeals granted Southern Union's
petition for review, set aside FERC's order refusing to issue the
declaratory order sought by Southern Union, and remanded the case to
the Commission for further proceedings. Pet. App. 1a-13a. As a
threshold matter, the court of appeals rejected Consolidated's claim
that the Commission lacked jurisdiction to consider Southern Union's
petition for a declaratory order. First, the court concluded that the
Commission's statutory authority "to determine and enforce first-sale
price ceilings for natural gas" includes "the incidental power to
determine whether in fact a state court action, however denominated,
has the impermissible effect of infringing the exclusively federal
prerogative." Id. at 6a, 7a (citing 15 U.S.C. 717u, 3414, and Arkla,
453 U.S. at 578-582). Second, the court determined that the prior
judgment of the New Mexico Supreme Court did not bar the Commission
from considering Southern Union's petition under the doctrines of
collateral estoppel and issue preclusion. Pet. App. at 7a-8a.
Turning to the merits of the Commission's ruling, the court of
appeals held that the Commission misapplied the "filed rate doctrine"
set forth in Arkla. Pet. App. 8a. In particular, the court
determined that the Commission erred by not "examin(ing) the practical
effect of the state remedy" in this case. Id. at 10a. The court
reviewed the record and concluded that the state trial court awarded
damages "that unquestionably were for the price of gas." Id. at 11a.
In the court's view, "the state measure of damages is based upon, and
has the effect of awarding, a price for interstate gas that, to the
extent the price exceeds federal guidelines, the state court has no
power to award." Id. at 12a. Accordingly, the court concluded that
the "calculation of damages * * * employed by the New Mexico courts
was inconsistent with preemptive federal gas-price regulation and that
the Commission failed to follow the controlling Arkla case." Id. at
13a (internal quotation marks and citation omitted).
In September 1989, the court of appeals denied Consolidated's
petition for rehearing and suggestion of rehearing en banc. Pet. App.
95a-97a. /5/
ARGUMENT
1. Petitioner Consolidated Oil & Gas, Inc., principally contends
(Pet. 11-15) that the court of appeals lacked authority to nullify the
New Mexico state court damages award in the context of reviewing the
Commission's declaratory order. This claim cannot be reconciled with
the system of regulation established by the Natural Gas Act.
Under Section 4(c) of the NGA, 15 U.S.C. 717c(c), sellers of
natural gas, such as petitioner, must file rates charged for natural
gas with the Commission; such rates are lawful only if the Commission
determines that they are "just and reasonable." Section 4(a) of the
NGA, 15 U.S.C. 717c(a). The Commission exercises exclusive authority
to determine the reasonableness of filed rates and no seller of
interstate gas may lawfully collect a rate higher than that filed and
approved by the Commission. Section 4(d) of the NGA, 15 U.S.C.
717c(d); see, e.g., Mississippi Power & Light Co. v. Mississippi, 108
S. Ct. 2428, 2439-2442 (1988); Nantahala Power & Light Co. v.
Thornburg, 476 U.S. 953, 963-965 (1986); Arkla, 453 U.S. at 576-577.
As this Court has recognized, the Commission exercises "exclusive
jurisdiction over the transportation and sale of natural gas in
interstate commerce for resale," Schneidewind v. ANR Pipeline Co., 108
S. Ct. 1145, 1151 (1988), which necessarily includes the power to fix
and enforce rates for those transactions. Under the filed rate
doctrine, /6/ "the right to a reasonable rate is the right to the rate
which the Commission files or fixes, and * * * except for review of
the Commission's orders, the courts can assume no right to a different
one on the ground that, in its (sic) opinion, it is the only or the
more reasonable one." Montana-Dakota Utilities Co. v. Northwestern
Public Service Co., 341 U.S. 246, 251-252 (1951); see, e.g.,
Nantahala Power & Light, 476 U.S. at 964-965; Arkla, 453 U.S. at 577.
Under the Natural Gas Act, the sole avenue for review of Commission
orders pertaining to interstate natural gas is in the United States
courts of appeals. Section 19 of the NGA, 15 U.S.C. 717r; see
Section 506 of the NGPA, 15 U.S.C. 3416; see also City of Tacoma v.
Taxpayers of Tacoma, 357 U.S. 320, 334-336 (1958).
As a consequence of that statutory scheme and the filed rate
doctrine, this Court has made plain that state courts, in the context
of resolving actions filed under state law, lack authority to award
damages that represent a change in the rate for natural gas approved
by the Commission and provided for by Congress in the NGA or the NGPA.
E.g., Arkla, 453 U.S. at 578-579; Montana-Dakota, 341 U.S. at
251-252; see also Square D Co. v. Niagara Frontier Tariff Bureau,
Inc., 476 U.S. 409 (1986). As this Court stated,
the mere fact that respondents brought this suit under state
law would not rescue it, for when Congress has established an
exclusive form of regulation, "there can be no divided authority
over interstate commerce." Missouri Pacific R. Co. v. Stroud,
267 U.S. 404, 408 (1925). Congress here has granted exclusive
authority over rate regulation to the Commission. In so doing,
Congress withheld the authority to grant retroactive rate
increases or to permit collection of a rate other than the one
on file. It would surely be inconsistent with this
congressional purpose to permit a state court to do through a
breach-of-contract action what the Commission itself may not do.
Arkla, 453 U.S. at 580.
The principles outlined above confirm that in this case the New
Mexico state courts, although empowered to award tort damages and
damages for breach of contract under state law, had no authority to
determine conclusively whether or not such a damages award was
preempted by the NGA or the NGPA. To the contrary, only the
Commission, subject to review by a federal court of appeals, may make
that determination. For that reason, petitioner's contention that the
prior state court judgment bound the court of appeals in its review of
the Commission's declaratory order conflicts with the system of
regulation established by the NGA and the NGPA. /7/
Similarly, petitioner's reference (Pet. 11) to a "head-on collision
between the federal and state courts" in this case is misleading.
Under a straightforward application of the filed rate doctrine, the
court of appeals' judgment that federal law precluded the state court
damages award means that the state court's contrary holding was
preempted by federal law. This result would be clear if FERC had
initially held that the state court judgment violated the filed rate
doctrine and the court of appeals affirmed; the result should be no
different simply because FERC initially reached a contrary conclusion
and the court of appeals reversed. Accordingly, on remand from the
decision below, the proceedings before the Commission will focus on
Southern Union's claim for a refund of the damages award improperly
collected by petitioner. See note 5, supra.
2. Petitioner also contends (Pet. 12) that the court of appeals'
judgment conflicts with decisions such as District of Columbia Court
of Appeals v. Feldman, 460 U.S. 462, 484 n.16 (1983), and Allen v.
McCurry, 449 U.S. 90, 105 (1980). In those decisions, the Court
reaffirmed the general principle that state courts may adjudicate
federal constitutional and statutory claims. But that fundamental
principle does not require a federal court to follow a prior state
court judgment where, as here, such preclusive effect would be
inconsistent with the statutory scheme Congress has enacted to govern
the subject matter at issue -- the regulation of proper rates charged
for the sale of interstate natural gas. See, e.g., Brown v. Felsen,
442 U.S. 127, 134-139 (1979); Kalb v. Feurerstein, 308 U.S. 433,
438-444 (1940); see Marrese v. American Academy of Orthopaedic
Surgeons, 470 U.S. 373, 386 (1985); Restatement (Second) of Judgments
Section 86 comment b (1982); cf. Mississippi Power & Light, 108 S.
Ct. at 2440-2442; A.L.T. Corp. v. Small Business Admin., 801 F.2d
1451, 1462-1463 (5th Cir. 1986). /8/
Indeed, were preclusive effect to be given to prior state court
litigation (in which FERC would not be a party), the Commission would
be forced continuously to monitor such proceedings and intervene in
any private actions that raise claims that might affect FERC's
regulatory jurisdiction over the sale of interstate natural gas.
Congress clearly had no intention of adopting such an inefficient
scheme that would frustrate the purposes of exclusive federal
regulation by the Commission. Instead, application of the filed rate
doctrine subject to the exclusive authority of the Commission, as
reviewed only by the federal court of appeals, ensures proper
administration of the uniform regulatory scheme created by Congress.
3. Finally, petitioner suggests in passing (Pet. 16-17) that
further review is necessary because this case presents an issue the
Court reserved in Arkla, namely, "whether the filed rate doctrine
applies in the face of fraudulent conduct." Arkla, 453 U.S. at 583
n.13. However, no such issue is presented by the record in this case.
As the court of appeals recognized, "(t)he state (trial court) has
found that Southern Union's conduct was negligent but not fraudulent."
Pet. App. 12a; see id. at 91a. And although the New Mexico Supreme
Court noted that the trial included "some evidence of actual or
constructive fraud," id. at 77a, that court also observed that the
trial court "did not find that Consolidated had proved fraud by clear
and convincing evidence as required by law," ibid. Accordingly, this
case does not present an occasion for the Court to address the issue
left unresolved in Arkla. /9/
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
WILLIAM C. BRYSON
Acting Solicitor General /10/
DAVID N. COOK
Acting General Counsel
JEROME M. FEIT
Solicitor
SAMUEL SOOPPER
Attorney Federal Energy Regulatory Commission
JANUARY 1990
/1/ Initially, the state trial court and Southern Union each sought
rulings from the Commission concerning the jurisdictional status of
the gas sold under those contracts. The Commission ruled that that
gas was interstate gas for which Consolidated could not collect
contract damages in excess of federal rates without first obtaining
authority from FERC. Pet. App. 18a-19a, 27a-29a; Southern Union
Gathering Co., 28 F.E.R.C. Paragraph 61,225, at 61,427 (1984), reh'g
denied, 30 F.E.R.C. Paragraph 61,350, at 61,708 (1985), aff'd sub nom.
Consolidated Oil & Gas, Inc. v. FERC, 806 F.2d 275 (D.C. Cir. 1986).
On Consolidated's motion for rehearing, the Commission later made
clear that, if the situation arose, it would consider any actual award
of damages in light of a number of factors, including the amount and
basis of the damages, the relevant facts of the case, and the
applicable legal principles. Pet. App. 34a; 30 F.E.R.C. Paragraph
61,350, at 61,711.
/2/ The trial court also awarded Consolidated prejudgment interest
of approximately $2.6 million. Pet. App. 92a.
/3/ As the court of appeals noted, FERC "has entered three orders,
all adverse to Southern Union, essentially on the grounds that the
(state court) judgment is in fact an award of damages for tort and not
for the purchase price of gas." Pet. App. 5a; see id. at 52a-53a,
55a-56a, 65a; Southern Union Co., 35 F.E.R.C. Paragraph 61,359, at
61,822 (1986), reh'g denied, 39 F.E.R.C. Paragraph 61,212, at 61,745,
reaff'd, 41 F.E.R.C. Paragraph 61,203, at 61,529 (1987). In this
case, the court of appeals reviewed only the Commission's final order
reaffirming its earlier decisions. See Pet. App. 5a.
/4/ In March 1988, while Southern Union's petition for review was
pending before the court of appeals, Southern Union paid the state
court judgment to Consolidated. See Pet. 7.
/5/ Judge Williams, joined by Chief Judge Wald and Judge Buckley,
dissented from the denial of rehearing en banc on the ground that
further review was necessary "to determine whether anything about the
filed rate doctrine requires exclusive jurisdiction." Pet. App. 98a.
After rehearing was denied, Southern Union filed a motion with the
Commission seeking an order requiring Consolidated to refund the state
court judgment. That motion remains pending before the Commission.
See Pet. 10.
/6/ The "filed rate doctrine," as this Court has stated, generally
"prohibits a federally regulated seller of natural gas from charging
rates higher than those filed with the Federal Energy Regulatory
Commission pursuant to the Natural Gas Act * * *." Arkla, 453 U.S. at
573.
/7/ Petitioner mistakenly relies (Pet. 12) on Pan American
Petroleum Corp. v. Superior Court of Delaware for New Castle County,
366 U.S. 656 (1961). In that case, this Court held that the NGA did
not preclude the state court from adjudicating "traditional common-law
(contract) claims" involving the purchase of natural gas where "(n)o
right is asserted under the Natural Gas Act." Id. at 663. And the
Court made clear that that lawsuit did not involve any issue with
respect to "the extent to which the Natural Gas Act reinforces or
abrogates the private contract rights * * * in controversy." Id. at
664. Here, by contrast, the state court action plainly involved the
ultimate federal question surrounding a recovery in excess of rates
prescribed by federal law.
/8/ For that reason as well, petitioner errs in contending (Pet.
12-13) that the court of appeals violated 28 U.S.C. 1738 and common
law principles of res judicata, which ordinarily would have applied
and required it to follow the prior state court judgment. See, e.g.,
Kremer v. Chemical Constr. Corp., 456 U.S. 461, 466-468 (1982); see
generally 18 C. Wright, A. Miller, & E. Cooper, Federal Practice and
Procedure Section 4470 (1981 & Supp. 1989). In any event, inasmuch as
FERC was not a party to the New Mexico state court litigation,
principles of res judicata could not bar the court of appeals from de
novo consideration of the Commission's declaratory order. See, e.g.,
Allen v. McCurry, 449 U.S. 90, 94-95 (1980); Blonder-Tongue
Laboratories, Inc. v. University of Illinois Found., 402 U.S. 313, 329
(1971).
/9/ In any event, petitioner has not sought certiorari on that
question. See Pet. i; Sup. Ct. R. 14.1(a).
Petitioner also suggests (Pet. 15-16) that the court of appeals'
failure to defer to the Commission's decision calls for this Court's
review. Apart from the fact that petitioner has not sought certiorari
on that question, further review is plainly not warranted where, as
here, the Commission has decided to accept the court of appeals'
judgment regarding the application of the filed rate doctrine and
Arkla to the particular facts of this case.
/10/ The Solicitor General is disqualified in this case.